Active Funds Struggle as Morningstar Reports Shift Toward Passive Investing in 2025

Active vs. Passive Fund Performance: A Shifting Landscape in 2025

In its latest semi-annual Active/Passive Barometer, Morningstar reveals a notable decline in the percentage of actively managed mutual funds and exchange-traded funds (ETFs) that outperform their index-based counterparts in 2025. Only 38% of active funds succeed in surpassing passive peers after fees, a decrease from 42% in 2024. The analysis encompasses a substantial dataset, covering 9,248 funds across various asset classes. This downturn signifies a worrying trend for active management, suggesting that amid the increasing popularity of passive investing, many active funds struggle to justify their higher expense ratios.

The report uncovers significant variations within different fund categories, highlighting the nuanced nature of active management's efficacy. For instance, diversified emerging-market funds exhibit a remarkable increase in performance, with 64% surpassing their passive equivalents—an impressive leap of 42 percentage points from just 22% in 2024. Conversely, actively managed real estate funds have experienced a stark decline, with only 12% able to outperform their passive counterparts, a striking drop of 54 percentage points from the previous year. The performance of active bond funds also declines, with only 40% outperforming passive options, a significant decrease from 64% in 2024. Despite these challenges, Morningstar points out that active bond funds maintain a 42% success rate over the past decade, indicating their enduring viability in a competitive landscape.

Financial advisors are acknowledging the need to adapt perspectives regarding active versus passive funds. Mike Casey from AE Advisors emphasizes that viewing both types as complementary rather than rivals could enhance investment strategies. This mindset underlines the resilience and unpredictable nature of financial markets, suggesting that both active and passive funds have essential roles to play in a diversified portfolio. While recent trends may indicate a declining performance for active management, the successes found within certain sectors, like emerging markets, provide a counterbalance, encouraging investors to remain open to various fund management styles.

In addition to discussing performance metrics, the report indicates an evolving sentiment in the investment industry. As the preferences of investors continue to shift towards passive options for cost effectiveness and simplicity, active managers are challenged to differentiate themselves through superior talent and strategy. The findings signal a pivotal moment for the active management industry, prompting a re-evaluation of approaches to deliver genuine value to investors.

This latest research underscores the dynamic nature of investment strategies and reinforces the need for continuous adaptation in a rapidly changing market environment. Morningstar’s analysis serves as a critical resource for advisors and investors alike, facilitating informed decision-making based on the latest performance indicators and trends within the mutual fund industry.